Strong euro-zone PMI, industrial orders provide surprise

Double-dip concerns ease, but outlook remains cloudy

By

WilliamL. Watts

LONDON (MarketWatch) -- Euro-zone data released Thursday offered further evidence the region's recovery remains on track despite the sovereign-debt crisis, with a gauge of July private-sector activity rebounding unexpectedly to a three-month high and a measure of May industrial orders showing an unexpected rise.

The preliminary July Markit euro-zone composite purchasing managers' index rose to a three-month high of 56.7, up from 56.0 in June.

Economists had forecast a decline to 55.2.

A reading of more than 50 points to a rise in activity, while a figure of less than 50 signals contraction.

Separately, the European Union statistics agency Eurostat said May industrial orders across the euro zone rose 3.8% compared to April and rose 22.7% compared to May 2009.

Economists had forecast a flat monthly reading and a 20% year-on-year rise. The agency, however, revised down the April rise to a 0.6% monthly increase and a 21.9% year-on-year rise.

The PMI figures, meanwhile, are among the most closely-watched data in the euro zone. The rise in the July data reflected an increase in the preliminary euro-zone manufacturing PMI to 58.3 in July from 57.2 in June, and a rise in the preliminary services PMI to 56.0 from 55.5.

"The flash PMIs for July show surprising improvements in rates of increase of both output and new orders following two months of slower growth," said Chris Williamson, chief economist at Markit. "The survey therefore shows a better-than-expected start to the second half of the year, with output growing in July at a rate similar to the average seen in the second quarter" and consistent with gross domestic product growth of 0.6% to 0.7%.

The euro
EURUSD, +0.1109%
extended a gain versus the U.S. dollar following the data to trade at $1.2857, up 0.7% on the day.

"July's rise in the euro-zone composite PMI suggests that, for now at least, the region is, perhaps surprisingly, evading the threat of a double dip apparently facing the U.S. and U.K.," said Ben May, European economist at Capital Economics.

But there are still reasons to remain cautious, May said, noting that the increase was driven largely by a sharp rise in German PMI, which jumped to its highest level since February 2007. German manufacturing PMI rose to 61.2 from 58.4 in June, while services PMI rose to 57.3 from 54.8.

But while a full breakdown isn't yet available, peripheral indexes are likely to have weakened again, highlighting divergences in the region, economists said.

Economists said troubling signs were also found in the data.

Markit's Williamson noted that inflows of new orders are growing at a pace well below the peak seen in April, partly due to signs export growth is slowing as global trade flows cool, while service providers offered the most downbeat assessment of future activity for eight months.

Marco Valli, economist at UniCredit Bank in Milan, said he still expects growth to ease in coming months.

The strong outcome in the July PMI data "probably reflects Germany's outperformance -- in the manufacturing sector in particular," Valli said, in a note to clients. "Moreover, the deceleration in the export orders index continues to suggest that the contribution from exports should moderate in the coming months."

The May industrial orders data, meanwhile, shows the manufacturing sector was "undoubtedly the most dynamic sector of the euro-zone economy during the first half of 2010, benefiting from improved domestic and, especially, export demand as well as inventory rebuilding," said Howard Archer, chief European economist at IHS Global Insight.

But it's "questionable" whether manufacturers can sustain the first-half performance as inventory corrections draw to a close, global growth slows and domestic demand in euro-zone countries is crimped by tighter fiscal policy, he said.

The export outlook isn't helped by the fact that the euro, which had slumped from above $1.50 versus the dollar last November to less than $1.19 earlier this year, has rebounded by nearly 10 cents, he said.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.